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Friday, August 30, 2013

Yesterday was a crazy day for the Rupee and the Indian Stock Market. The Rupee halted its downward spiral and stabilized. After days of southward movement the market stabilized and went north. The BSE went up by 404 points and the NSE for its part went up by 124 points. Logically speaking, a market goes up when people start buying stocks and the no. of buyers outnumber the no. of sellers. Simple - Demand and Supply logic. But, with the economic growth sluggish in our country, the rupee being as beaten up as it is and with no visibility on recovery measures from our government and policy makers, do you really think that people have already regained confidence in our markets?

So, given all this information, what do you think made the stock market recover? Care to venture a guess???

LIC Has Started Buying Shares

Did you expect this to be the reason for the upward momentum? I am sure you did not...

Though there is no official or confirmed notification from either market regulators or from LIC, we cannot be 100% sure that they are indeed the reason for this upward momentum but I guess they are at least partially responsible for this upward movement.

Is this the first time LIC is rescuing our markets?

Absolutely Not. LIC has been coming to the rescue of our stock markets every time there is some kind of crisis like what we are facing right now. The finance ministry requests LIC to pitch in and pump in some cash into the markets to boost volumes and to stop the free-fall and almost always LIC obliges.

In 2010-11, the government raised Rs 22,763 crore by divesting stake in six companies - SJVN, Engineers India, Coal India, Power Grid, MOIL and Shipping Corporation of India. LIC had invested close to Rs 8,000 crore for buying shares in these companies.

Last year we had a divestment by ONGC and LIC picked up 88% of the shares divested by the Government. This year in Hindustan Copper Offer for Sale, they picked up 22.5 million shares which again was a huge chunk of the total shares divested. Experts expect this trend to continue in the future divestment programs that are coming up in government owned entities.

How Does LIC Manage to do this?

Funds have never been a problem for the government owned Insurance Co. Every year the senior management comes up with a % allocation of their funds that is to be invested in the Equity Markets and the funds work out to approximately 40,000 crores or more. This year sources claim that LIC has already set aside around 2000 crores to invest in Banks in our markets and another 10000 crores for the government divestment programs. They still have room in their equity allocation limits which is what they are using now to invest into our stocks and stabilize our market.

Quick Statistics:

1. In case of ONGC, LIC has picked up over 40 crore shares, or 93 per cent of the 42.78 crore shares sold, at a price of Rs 304.25 per share, including brokerage and STT. It shelled out Rs 12,179 crore for buying ONGC shares.

2. In case of the NTPC OFS in February 2013, LIC picked up 12 crore shares worth Rs 1,765 crore, of the 78.33 crore shares on that were available for sale.

3. In NMDC disinvestment in December 2012, LIC bought 1.86 crore shares for Rs 278 crore, against 39.65 crore shares that were available for sale.

4. In case of SAIL, LIC purchased 12.45 crore shares, out of the 24.04 crore shares that were put up for sale. LIC's investment was Rs. 786 crores

5. In case of NALCO, LIC purchased 7.22 crore shares, out of the 15.69 crore shares that were put up. LIC's investment was valued at Rs. 289 crores

As you can see, LIC has been repeatedly investing huge sums of money in government companies on a regular basis.

Is this a Good Idea?

No, I don’t think so. When the investment experts in LIC come up with a detailed rationale on why they should invest in a stock there is merit in the decision but investment decisions triggered by the finance ministry to stabilize the market isn’t always the best idea.

From the statistics in the previous section, LIC has invested over 15,000 crores into Government run corporations. If we compare this against the current valuations, LIC is looking at, at least 20% or more losses.

Where is all this money coming from? - Money Invested by Policy Holders through their Insurance Premiums.

What Will be the Impact?

Impact No. 1: Earnings for Policy Holders will come down

LIC guarantees only around 4-6% returns on the premiums that are collected. The final bonus component that gets accrued into your policy is based on the company's overall performance and given the magnitude of losses LIC is making due to investment in Government run corporations, I highly doubt policy holders getting good bonuses.

Isn’t that bad news?

Impact No. 2: The government may have to bail-out LIC in Future

LIC has one of the lowest Solvency Margins in the Indian Insurance Industry. The solvency ratio is 1.54 for LIC and to compare HDFC Standard Life has 1.88 times while ICICI Prudential has 3.71 times

The solvency ratio is the sum of capital and market value of assets that insurers have to maintain over their insured liabilities.

If the Solvency Margin goes below the mandated levels (1.5 times) then the government would have to come up with a fresh fund infusion - which is technically a bailout. If LIC does not have enough funds to keep up its solvency ratio, it is technically putting in danger all of the insurance policies and the maturity amounts of millions of middle class Indians.

This is probably the biggest risk. This random investment in the stock markets by LIC is putting the livelihoods of millions of Indians at risk which I feel is a really bad idea. Let us just hope that the market recovers and LIC's prospects improve and the Government does not have to bail-out LIC.

Some Last Words:

Investments in Equity Markets is always risky especially when we invest because we are asked or told to rather than by our own accord. LIC is treading on the dangerous line and is investing because it is helping the Government Raise Funds through its divestment programs. But, at the end of the day LIC is owned by the Government and so technically, it will definitely pitch in and rescue LIC in case of the unfortunate situation (Like what the US Government did a few years ago to bailout AIG). But, that will put further pressure on our Economy and Markets...

As I said before, the markets will continue to remain volatile. So, stay cautious and invest only after thorough analysis and for the long-term. For the short-term CASH IS KING.

Disclaimer: All views expressed above are the authors personal opinion and the data was gathered from the Internet. The author does not guarantee the accuracy of the claims in the article.

Thursday, August 29, 2013

The Stock Market has tumbled over the past couple of weeks and one group of people claim that the fall in the value of the rupee is one of the key culprits. Then we have another group that claims that the fall in the stock market is partially the reason for the depreciating rupee. What do you think is correct?

For a change, let me start off this article with the answer - Both group of people are right in their claims. The purpose of this article is to understand why both groups are correct!!!

FIIs & Their Role in the Indian Stock Market

FII's are an integral part of any stock market especially the ones like India which are considered extremely attractive.

Definition of an FII: Source Investopedia

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.

Though the actual % of FII Investments in the stock market will keep varying on a daily basis, they account for a pretty big chunk of money that is invested in our markets. The chunk is big enough that when FIIs start selling our markets tank and tank big time. The recent stock market fall is a classic example. FII's have turned sellers and are liquidating their positions therefore the stock market is falling freely.

So, What Triggered this Panic Selling?

Let me give you a real life scenario. Let us take myself as an Example. Let us say I have bought 1000 shares of Infosys on 1st April 2013 at Rs. 2943/- per share. On that day 1 SGD was worth 43.73 Rupees.

As of Today, the price of 1 share of Infosys is selling at 3108 (At the time of writing this article) which is a gain of 5.6% in 5 months which is cool. But, 1 SGD = 53 Rupees today.

Current value of Investment in Indian Rupees: 31,08,000
Current value if Investment in Singapore Dollars: 58641.5

So, technically my stock has gone up by 5.6% in Rupee terms but since the Rupee is so devalued when compared to the time I invested, I am currently sitting at a loss of over 12%

Given the current economic outlook and the fact that the rupee may fall further, do you think I would want to continue to stay Invested?

Absolutely Not

This is exactly the reason why all FII's are pulling out their investment because, they want to salvage whatever they can of their investment before it erodes further in value. This mass selling is resulting in the stock market going further and further south.

So, we have proved one groups theory - The Falling Rupee is the reason for the Stock Market Crash.

Does this Market Crash have an impact on the Rupee?

Definitely Yes. All these foreign investors who are selling their shares in the Indian market are effectively pulling out foreign currency from our Market. Overseas investors have pulled out nearly Rs 18,500 crore from the Indian capital markets in July. In their highest monthly outflow, overseas investors pulled out a record Rs 44,162 crore in the month of June. Outflows of this magnitude has put a continuous pressure on rupee not allowing it to come out of the slump. With FII's selling more and more on a daily basis to salvage their investments, the rupee is continuing to get beaten down further.

so, we have proved the other groups theory too - The Falling Market is also a reason for the Falling Rupee

What to Expect in the Near Term?

The Rupee has actually stabilized today and so has the stock market. In fact it has posted handsome gains as of this writing. However, I highly doubt if this will last in the long run. Though as an Indian I really want the Indian currency to recover and our markets to get back on the bull, the policymakers are the ones who can really have an impact. The new governor of RBI is taking charge in a few days and given his impressive resume market analysts and industry experts are expecting him to turnaround the fortunes of the Rupee and save the economy.

But, in the short-term (around 3-6 months) don’t expect the market to go up by much. It will remain volatile as it is now and will be going up and down until there is clear-cut picture of what to expect from the new RBI Governor, the elections in 2014 and the overall Indian Economic scenario.

Wednesday, August 28, 2013

In the previous article we took a look at the impact the Food Security Bill will have on our budget. The amount of money we will end up spending, where we will get the money and so on. To quickly recap, the Food Security Bill is going to offer rice, wheat and other food grains at heavily subsidized prices which will result in an expenditure of around 1.2 to 2.4 lakh crores. So, now we know that our government is keen on pushing for this scheme and in the next few months it will eventually be put in practice. We will start incurring this huge expenditure which invariably will have a significant impact on our Economy.

The idea behind this article is to analyze the impact this will have on the various aspects of our Nation’s Economy...

Impact on Economic Growth:

Remember the last section from our previous article on how the government will fund this huge expenditure? The government would resort to borrowing to fund it. When the government enters the borrowing market, in order to entice investors, it would have to offer good interest rates. The private sector too would have to hike their interest rates in order to stay competitive. This means, the Interest Rates will continue to remain high. High Interest rates is never good for economic growth.

Verdict:

Impact on Food Inflation

Have you heard of the term - "Minimum Support Price or MSP"?

This is something the government sets/declares every year as the price at which it buys grains from farmers. This grain is then used by the government for all its various schemes. The grains to be distributed under this Food Security Program too will be procured like this.

Minimum Guaranteed prices means, farmers will have more incentive to grow rice/wheat and other grains covered under this scheme. This might result in Vegetable production getting affected which will further affect the nation’s Food Inflation.

In the last 5 years, food inflation contributes to over 41% of our overall Inflation. So, by subsidizing the price of rice, wheat and a few cereals, it might result in an unintended consequence of other items becoming costlier which will result in overall higher food inflation.

Verdict:

Impact on Overall Inflation:

An alternate to funding this scheme is for the government is to "Print Money". World History is full of classic examples where governments resorted to printing more currency to fund its cash requirements. This is never a good idea and will result in the country's overall Inflation going higher.

Let us just hope that the finance ministry does not resort to this technique otherwise our economy would be doomed for a very long time

Verdict:

Impact on Savings

Higher food prices mean higher inflation. Higher inflation means people will end up spending a higher % of their income to meet their day to day needs. This will result in much lower savings.

Verdict:

Impact on Economic Growth

Lower Savings and lower surplus income means - people will spend a lower amount of money on consuming good and services and therefore the economic growth will slow down further.

Verdict:

Impact on the Current Account Deficit:

We all know that Importing of Gold and Petroleum products is the biggest contributing factor to our nation’s Current Account Deficit. Right?

The Food Security Bill guarantees food for the people covered under the scheme. So, if in a particular year, the in-country production of either rice or wheat is not sufficient we would be forced to import it. So, if we start importing rice, wheat or any other food grains, it will further widen the Current Account Deficit.

Verdict:

Impact on the Rupee

The Rupee is bleeding left, right and center. It is falling freely and god knows when it will stop. Anyways, lower savings and wider current account deficit will impact the rupee.

If India does not save enough money, it means that, we will have to borrow capital from foreign countries/investors. When these foreign borrowings need to be repaid, it will almost always be using dollars. This will put pressure on the rupee and lead to further depreciation against the dollar.

On top of this, buying rice or wheat from the international market means, we will be paying in dollars. This will lead to increased demand for the dollar and result in further depreciation of the rupee.

Verdict:

Impact on Fertilizer and Power Subsidy:

In order to grow food grains, farmers use fertilizers and electricity. Both of these items are already heavily subsidized for farmers. The procurement needs of the Food Security Bill will result in intensive cultivation using more fertilizer and power, which will push up central subsidies on fertilizer and state subsidies on power.

So, in order to procure enough food grains, the government will be forced to shell out more subsidies for both fertilizers and power which again will leave a big dent in the nation’s budget

Verdict:

Some Final Words:

As you can see, the Food Security Bill will have a significant negative impact on almost every aspect of our economy. The impact is huge and with high inflation, slow economic growth and depreciating rupee, the chances of the stock markets regaining its upward momentum are very slim as of now.

With the market going down by more than 2000 points in the past couple of weeks, some amazing investment opportunities have turned up. However, the market is not for the faint of heart right now. As of now, things don’t look very bright and hence further downside is a very real possibility. So, if you are looking at investing in the stock markets, be cautious and split up your investments across a wide time period to average out your cost. Do not invest money that is earmarked for emergencies into the market in the current volatile scenario. Keep it as cash in your bank account or park it in a bank FD.

Invest only in blue-chips or large organizations whose stock prices are much more stable than mid or small cap companies. Stay cautious.

Happy Investing!!!

Disclaimer: The idea behind this article is not to cover the political motives of either the ruling party or the opposition. This article is my personal opinion about this Food Security Bill purely from an investment and economic stand point. The author does not guarantee the accuracy of any of the claims in the article.

The past couple of weeks have been extremely painful for the Indian Investor and the Indian Economy as a whole. In a couple of weeks, the Sensex is close to 17000 from its 19000 levels and the Rupee is on the verge of breaching the 70 mark against the US Dollar. Things do not look good for the Indian Investor. Personally, I feel that the market will be volatile in the next 3-6 month time frame. To top this all off, our MP's have passed an ambitious food security bill this week in the Parliament and are trying to take credit for the same since elections are due next year.

At a high level you must know already that the food security bill is something to do with economic subsidy for the less privileged and the government will foot the bill. The idea behind this article is to go over the key impact this food security bill will have on the Indian Budget.

So, What is this Food Security Bill?

The Food Security Bill guarantees 5 kg of rice, wheat and coarse cereals per month per individual at a fixed price of Rs 3, 2, 1, respectively, to nearly 67% of the population.

Food is one of Man's most basic needs and the government is trying to make it more accessible to the people who are on or below the poverty line. This is an ambitious attempt and personally I feel that this scheme will be useful to the low-wage earners in our country if implemented properly. Anyways, how it is implemented or whether it will be implemented properly is not our concern from this articles perspective. Let’s worry only about the Economic impact.

So, how much will this Food Security Bill cost our Government?

67% population means around 85 crore individuals (Assuming our population as 130 crores)

The selling price of any average quality Rice is around 20 rupees per kg. So, if the Government is planning on selling it at Rs. 3 per kg, then the difference Rs. 17/- will be the subsidy the government is offering. So, for 5 kgs the subsidy is Rs. 85/- per person. For 85 crore people imagine how much subsidy the government has to give. You can take the average selling price of all these items that come under this bill, subtract the selling price from market price and voila, you will end up with the total subsidy per person.

The highlight is, this is on a monthly basis. Which means, the government will incur this subsidy bill every month and forever.

A guideline estimate by the Government suggests that the overall impact this Food Security Bill will have on its exchequer will be around 1.2 lakh crores. Economists and industry experts feel that this estimate is highly optimistic and may go up to 2.4 lakh crores.

A point to remember here is that, this estimate is just for the subsidy the government will be offering. The additional expenditure that is required to set up system through which this scheme will be brought to the common man, setting up operations, movement of the food grains, storage of the grains and so on is not part of this estimate. If we include all those factors the actual bill the government will foot will be much higher than this estimate.

Another important point to remember here is that, the food security scheme is an open ended scheme. This means that, there is no end date or expiry date for this scheme. It will be a never ending phenomenon that covers 67% of our population irrespective of whether they need that subsidy or not. This means, as our population goes up, the expenditure too would keep going up.

What is the Government Saying about this huge expenditure?

The government is using our GDP for comparison purposes and is saying that the expenditure for this Food Security Bill will be between 2-3% of the nation’s GDP. 2 to 3% doesn’t sound big, right???

Is this a fair % comparison?

After reading the last line you may have thought, 2-3% doesn’t sound so big. What impact would that have...

Did you think that?

GDP stands for Gross Domestic Product and is the total value of all goods and services that are produced within our country. It does not refer to the total amount of money the Indian Government earns through taxes and other revenue channels. Now, go back and read the claim in the previous paragraph and think if this 2-3% is a reasonable comparison.

I am sure you will agree that a more accurate comparison would be as a % of the country's total income.

So, what is our country's total income?

The projected Income for our country in the financial year 2013-2014 is around 11.2 lakh crores. This is the difference between our total revenue/earnings and the loan interest & repayments we do from the various entities we have borrowed money from.

So, 1.2 lakh crores as a % of 11.2 lakh crores works out to 10.7% and if we take the higher limit estimate of 2.4 lakh crores the % soars to 21.4%

The government is proposing to spend between 10-20% of its gross income to meet the cash needs of this Food Security Bill. This scheme will put immense pressure on the nation’s fiscal deficit.

Fiscal deficit is defined as the difference between what a government earns and what it spends.

How will this extra expenditure be financed?

If the government has to spend 10-20% of its income on this scheme, it means that the corresponding amount has to be reduced from other schemes like Infrastructure projects or educational projects and so on. The nation’s income is not going to go up by 20% to meet this additional cash requirement overnight. So, the finance ministry will have to either borrow to meet this additional cash demand or cut expenses on other projects to accommodate this.

Given that our economy is in a bad place right now, hiking taxes is not a good option. Add in the fact that we have elections next year; the option of hiking taxes is ruled out. Budgets for most projects for the next few years are also allocated and earmarked from our revenue and hence cutting expenditure too is ruled out. So, the only option available for the Government is to "Borrow"

Schemes like National Savings Certificate (NSC) or Infrastructure Bonds etc. are classic examples of Government Borrowing.

So, to summarize, the Government is planning to borrow many more lakhs of crores in order to fund this ambitious scheme. As you may have guessed by now, this will have a significant impact on the Indian Economy as well. We will be covering that in our next article...

Disclaimer: The idea behind this article is not to cover the political motives of either the ruling party or the opposition. This article is my personal opinion about this Food Security Bill purely from an investment and economic stand point. The author does not guarantee the accuracy of any of the claims in the article.

Wednesday, August 14, 2013

Have you missed the tax filing deadline set up by the Income Tax Department of India? Are you worried about it and are not sure what to do next? Then, this article is just for you. You could've been sick or had to travel on an urgent business trip or in the worst case were just lazy to finish the formalities on time. Whatever be the reason, missing to file your tax returns by the deadline is not a good idea and you will have implications which could leave a hole in your wallet.

So, what was the deadline for filing the tax returns for the previous financial year - April 2012 to March 2013?

The original deadline was 31st July 2013. The IT Department extended it until 5th of August 2013 to help the last minute filings to complete without any penalties.

If you are someone who has not filed his/her tax returns yet, you will fall under either of the 3 below groups:

Group 1: I have No Tax Liability
Group 2: I will get a Tax Refund
Group 3: I have Outstanding Tax Liability

Let us see the implications on you if you fall in either of the above 3 groups...

Group 1: I have No Tax Liability

You are someone who has already paid all your tax dues for the previous financial year or your company has already deducted sufficient TDS from your salary to cover for your tax liabilities for the previous year. So, technically you don’t owe the IT Department any money.

Impact of not filing by deadline:

The income tax return for any assessment year can be filed till the end of that assessment year without any penalty. If it is filed after the end of the assessment year, there is a lump sum penalty of Rs. 5,000. So, you have time until March 2014 to file the tax returns for the financial year that ended on March 31st 2013. If you miss this deadline, you will need to shell out 5000 rupees from your pocket in order to file your tax returns.

Group 2: I have to get a Tax Refund

You are someone who has already paid more than sufficient money to cover for your tax liability for the previous year or your company has already deducted surplus TDS from your salary. Effectively, the IT department owes you money. They will refund the surplus money to you, as soon as you file your tax returns...

Impact of not filing by deadline:

There is absolutely no impact here. You can file your returns anytime you want. The only drawback here is that, the surplus money that the IT Department has will only be refunded to you after your Tax Returns is processed. So, if you are in no hurry to get your tax refunds, you can take as much time as you want. However, returns that are filed at odd times usually take much longer time to process when compared to those that are filed during the peak tax filing season...

Group 3: I have Outstanding Tax Liability

You are someone who is yet to pay his/her full tax liability to the Tax Department. This could be due to additional sources of income like "Rental Income" or you could be a businessman or a trader who is yet to complete calculating your accounts. Whatever be the reason, you fall in the group that has the most impact.

Impact of not filing by deadline:

Just like group 1, you can file your tax returns up until December of this year without any additional Penalties. However, you will have to pay 1% interest on the outstanding tax amount.

For ex: If your total tax liability was Rs. 1 lac and you have paid Rs. 50,000 so far. While filing returns, you need to pay Rs. 50,500/- after adding up the 1% interest on the balance tax amount that is not yet paid.

If you don’t file the returns by March next year, you will end up paying Rs. 5000 + the 1% interest on the outstanding tax amount.

A Tip:

These penalties and interest % is revised regularly to deter people from delaying their tax return filings. So, next year this number could change to say Rs. 10,000/- penalty and 2% interest. If you file your returns on a future date, the penalties applicable at the time of filing will apply to you.

Some Last Words:

The government is giving citizens 1 year time time to file their tax returns which is more than sufficient for us to complete all requisite formalities. After all, this is a matter of a couple of hours of work if you enlist the help of a tax filing company or a matter of a couple of days if you opt to do it yourself. Either ways the penalties and interest are something we can avoid by completing our tax filing on time.

Every Investor is looking for the next hot stock tip. A stock whose price will double or triple in a few months. However, one of the often ...

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All the contents of this blog are the Authors personal opinion only and are not endorsed by any Company. This website or Author does not provide stock recommendations. The purpose of this blog is to educate people about the financial industry and to share my opinion about the day to day happenings in the Indian and world economy. Contents described here are not a recommendation to buy or sell any stock or investment product. The Author does not have any vested interest in recommending or reviewing any Investment Product discussed in this Blog. Readers are requested to perform their own analysis and make investment decisions at their own personal judgement and the site or the author cannot be claimed liable for any losses incurred out of the same.